In the first few lectures in my Financial Econometrics course I emphasise that analysing financial data should be an iterative learning feedback process, where an initial idea may be modified after some statistical analysis reveals an incomplete or incorrect answer to our initial hypothesis. It is important for my students to understand that econometrics is not about producing ‘black box’ results from statistical software but is a gradual learning pathway which leads to asking the correct question using the correct empirical design and data. This enables the analyst to avoid what Kennedy called Type III errors; getting a statistically precise answer to the wrong question.

Here is a short video explaining this process: